A Reuters story by Anthony Boadle and Jennifer Saba properly questions the deal’s wisdom:

The move … comes at a hefty premium. AOL is estimated to be paying 32 times earnings before interest, taxes, depreciation and amortization for The Huffington Post, said Benchmark Co. analyst Clayton Moran.

Similar content deals, such as Hellman & Friedman’s acquisition of Internet Brands in September 2010, typically go for eight to 12 times earnings, said Moran.

Based on conventional metrics, AOL is overpaying by roughly $200 million. Why?

Perhaps it’s because this deal looks like a bargain compared to other clunkers in AOL’s past. In 2000, AOL bought Time Warner for $162 billion. Today, after a near-total unwinding of that deal and more business missteps than can be counted, the company is worth $2.34 billion. Oops, make that $2.26 billion, as the stock fell 3.4% on Monday on news of the HuffPo acquisition. In June of last year, AOL sold the social network Bebo, an $850 million 2008 acquisition, for the princely sum of $10 million. These guys still know how to pick ‘em, don’t they?

Matt Drudge is trying to make an issue of the fact that HuffPo’s backers “had sought an exit.” Well of course they did. That’s what venture investors do, either by taking a company public or by selling out to a larger firm. There’s nothing unusual in that.

What is unusual is that AOL, which has been telling the public that it has “built a news operation that relies far less on wire reports and focuses instead on original reporting, analysis and commentary,” would want to associate itself with:

An entity which, along with its principals, has been sued by a pair of former Democratic Party consultants who claim that Huffington and business partner Ken Lerer “stole their business idea.” It would be easy to dismiss the legal action as a money grab, but progressive co-plaintiffs Peter Daou and James Boyce are not minor actors, and at least on the surface their arguments seem credible.

A CEO who “has been accused of lifting portions of a number of her books from other authors, and in one case had to dole out a 5-figure settlement to put plagiarism charges to rest.”

Someone who appears to have started up her enterprise on false pretenses. Envirozealot Laurie David, a good friend of Arianna, has said that before the business began, “everybody was talking about the antidote to the Drudge Report, and from the very beginning she was thinking of that and so much more.” That’s interesting, because “in her initial blanket e-mail to recruit bloggers to the site, she promised it ‘won’t be left wing or right wing; indeed, it will punch holes in that very stale way of looking at the world.’” Late Monday evening, HuffPo’s home page featured very, very stale offerings from the left-wing likes of American Prospect co-founder Robert Kuttner, Co-Director of the Center for Economic and Policy Research Dean Baker, Democratic Congressmen Dennis Kucinich and Mike Honda, the aforementioned Ms. David, Brady Campaign President Paul Helmke, and “special admirer” of Bill Clinton Nina Burleigh. The only item I located coming from a clearly sensible conservative perspective was one co-authored by Reason’s Nick Gillespie and Cato’s Veronique de Rugy.

An astroturfing activist chief executive who on impulse spent an estimated $250,000 so that 100 buses full of New Yorkers could attend Jon Stewart’s laughably misnamed “Rally to Restore Sanity” in Washington last October.

The guess here is that it was HuffPo and not personal money which paid for those buses. Arianna, who is a millionaire many times over thanks to a divorce settlement from her previous marriage, has nonetheless been remarkably proficient at keeping money from leaving her personal pockets, and just about as effective at keeping company cash locked in the vault.

At inception, Huffington’s investment consisted entirely of sweat equity; she “did not invest but brought in others who did …”

Her operation has been a pink-collar sweatshop from the beginning. In 2005, shortly after start-up, she told a Business Week blogger that the operation was suffering from a serious logjam (bold is mine):

Arianna Huffington tells me that HuffingtonPost, the meta blog she established in May, has a backlog of 15,000 comments to the site’s 400-odd blogs. She says that volunteers are wading through the comments and posting as many as they can. But they can’t keep up.

It must be nice to screw up your initial business planning and not have it cost you anything.

To the extent that some of the backroom folks still aren’t getting paid (according to Wikipedia, the operation has about 60 employees), they have lots of company. Since start-up, HuffPo hasn’t paid its bloggers either, despite getting $1 million, $5 million, $5 million, and $25 million, respectively, in angel, first-stage, second-stage, and third-stage funding, and achieving revenues of about $30 million. Even beyond the financial considerations noted earlier, AOL is gambling that HuffPo’s apparently across-the-board gratis arrangement with its content providers, who as of mid-2009 numbered about 4,000, will continue. Why in the world should it?

If an already well-heeled conservative or even a political agnostic built such a business model and allowed it to continue even after handsomely cashing out, news outlets would be ripping him or her limb from limb for serial exploitation of the naive. But because she holds politically correct views, and because her operation opportunistically serves as one of the left’s more ruthless and far from civil attack dogs, I expect that almost no one in the establishment press will even raise the issue. This column will probably be one of the few places where you will see anyone question how Arianna Huffington and her investors can sleep at night with even more millions of dollars stashed safely away, knowing that they achieved their gains largely on the backs of free, starry-eyed help.

3 Comments

Hi Tom: Great post. AOL stock has been down every day since the HuffPo acquisition was announced earlier this week. Hundreds of billions of dollars in market value has been destroyed. I have read that Ms. Huffington has taken her cut, about 100 million bucks, in cash. She is laughing all the way to the bank. AOL probably got left holding the bag.

#1 Bill, Drudge is saying that Arianna got $18 mil, which frankly makes more sense. I don’t think that after four rounds of financing the entrepreneur who put up no $ ends up with one-third, which is what $100 mil works out to. 6%, i.e., $18 mil, intuitively seems more correct.

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